Airlines should switch to leaner business models: KPMG

Published: Thursday, July 3, 2008, 16:34 [IST]

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New Delhi, Jul 3 (UNI) Projecting India's air traffic to grow to 310 million by 2012, a KPMG study released here today highlights that the airline industry can improve its profitability despite rising ATF prices by improving its efficiency, switiching over to leaner business models and optimisation of business operations.

Although the high prices of ATF are taking its toll on the profitability of airlines, the KPMG study says that it is currently not possible for any airline in India to make profits within three years of starting operations. This has been attibuted to the fact that based on prevalent capital expenditure, the break even for an average airline typically occurs in a minimum of five to seven years of operations.

ATF at present accounts for 30 to 35 per cent of airline operating costs. It is relevant to note that an airline would only spend on ATF when it operates a scheduled flight and coincidently enough, that is also when it generates revenue.

The study by KPMG in India is entitled: 'Indian aviation: Flying Through Turbulence.' During April-March (2007-08), both domestic and international passenger traffic in India registered a noteworthy increase.

While the international passenger traffic grew at a rate of 15 per cent, the domestic air traffic grew at 23.8 per cent during the same period which led to aircraft movement also showing an upward trend.

The strikingly rapid rise in domestic and international traffic can be attributed to increased capacity at airports and greater air connectivity across destinations.

While oil prices across the globe have risen sharply, the increase in traffic from Tier II and Tier III cities has sent a clear message that air travel cost including fuel surcharges would offset high ATF rates. The primary reason for this is the volume growth.

For instance, the growth in air traffic for the industrial city of Coimbatore in Tamil Nadu is as high as 300 per cent.

Air travel is increasing becoming the primary travel medium and consumers are no longer associating it as a luxury but as a sound and highly bankable mode of transportation.

The study makes out a case for improving airline related processes and cost optimisation of their business operations.

Responding to reports of a likely slowdown in the aviation sector in India, it states that the growth in air travel globally and in India will be adversely influenced by epidemic outbreaks, economic recession, terrorism, shifts in policy and regulations and competitive markets but not by oil prices.

Hence, airline's expenditure on fuel is directly proportionate to occupancy and load.

'The airline business today is one of the most complex industries.

Its profitability, revenue and yield are predominately driven by economic and external factors and this makes it most vulnerable to even the slightest variation in economic growth rates, national disasters, epidemic outbreaks, terrorism, war, currency fluctuations and most importantly oil prices,'' Mr Raajeev B Batra, Executive Director KPMG in India said.